A general resource for employees and management alike, covering issues old and new in the law of Ontario employment relationships.

Sunday, June 10, 2012

Breaching Employment Contracts

In my recent post about employment contracts and statutory minimum entitlements, it might be noted that some of the 'example' language used did not allude to 'pay in lieu of notice'. When terminating employees on a not-for-cause basis, most employers give pay in lieu of notice rather than actual notice, so doesn't it make sense to build 'pay in lieu of notice' into the contractual language? Give the employer the contractual right to do that which the employer is most likely to actually want to do?

To be perfectly frank, that's a common approach. Many - perhaps most - employer-side lawyers use contractual notice entitling the employer to dismiss on a certain amount of "notice or pay in lieu of notice", or some such formulation. And in some circumstances I will as well, but in general I find the term to be better without the 'pay in lieu' option.

This is an area where the principles of employment law are slightly broken, which is why the standard approach of entitling the employer to terminate on 'pay in lieu of notice' hasn't exploded in anyone's face yet. But if it ever gets fixed, there will be a lot of employers out there with numerous contracts that don't do what they want.

There are several possible issues, including formulaic ESA compliance, actual increased ESA liabilities, and mitigation.

But first let me begin with an explanation of why the language usually doesn't help an employer much.

Efficient Breach

The concept of "efficient breach" has long been an integral part of contract law. With a handful of exceptions, you can, and should, breach a contract when the cost of completing the contract is more than the damages the other side will suffer because of its breach. Then you compensate the other party by paying him the value of his losses, and all is well. It's a complicated and nuanced doctrine, but the point is this: There is nothing wrong with breaching a contract, in general. The Courts will make you compensate the other person, but they will not look to punish you for a breach of contract, without more.

There are caveats, of course. Sometimes, a party can seek 'equitable' relief to force you to carry out your obligations. (This doesn't apply to notice requirements, though it can apply to restrictive covenants.) Punitive damages can be sought where there is a separate actionable wrong - i.e. where you did something worse than simply breach the contract. And you have to take a somewhat expansive view of 'damages' - if it is reasonably foreseeable that the non-breaching party is going to suffer significant mental distress as a result of the breach of contract, you may have to compensate them for such damage as well. (That's relatively new - it used to also require a separate actionable wrong - but we used to have Wallace damages instead. For employers, this is a good trade-off.)

When you breach a contract, the measure of compensation for the other party will be whatever is required to put them into the same position they would have held had the contract been satisfied. In a dismissal context, this means that, if you're entitled to dismiss only on notice, but you dismiss without notice, the damages suffered by the employee will be based on what they would have earned through the notice period - i.e. pay in lieu of notice. This is the common law framework. Under the ESA, you're entitled to satisfy statutory obligations via pay in lieu (with continuation of benefits), so that isn't a problem.

Assuming you do terminate an employee without notice, the difference between a contract entitling you to do so and a contract that doesn't is this: One way, you pay x pursuant to the terms of the contract; the other way, you pay the samex by way of damages for breach of contract.

Not quite right, though. Mitigation expenses could get added to the tab of the breaching employer, but for reasons I'll go into shortly, the flip side of that is potentially beneficial to the employer.

Also, it is possible that certain sums - bonuses for example - could be excluded from a contractual 'pay in lieu of notice' term, whereas they would be inferred to be part of a damages calculation. Yet the exclusion from the 'pay in lieu of notice' term could invalidate the termination language itself, as I explained in this recent post. In reality, it would be no less difficult to craft an *actual* notice clause which excludes bonus entitlements, and doing so one would be more likely to be cognizant of the ESA requirements.

In general, though it requires attention regardless, a party's obligations following a breach of contract will be calculated from the perspective of what the minimal performance of the contract would have been. So common law damages principles will often, in and of themselves move the employer's liabilities towards the lower end of what is required, without the potentially risky task of spelling out each entitlement specifically.

Problems with Contractual Pay in Lieu of Notice

Formulaic ESA Compliance

Recall that I recently posted about the Superior Court's confirmation that a formula which will not - in all possible scenarios - fully meet the ESA minimums will be void, and not enforced.

What I pointed out in that post is that many contracts are too specific in the employee's entitlements and too broad in excluding the possibility of additional rights. "Pay in lieu of notice" lacks clear definition in contractual language, and will often be accompanied by a description of what it includes, and language making it very clear that nothing behind the specifics described are included. If you fail to include something that would be captured by the ESA - benefits, shift premiums, vacation pay, overtime in some cases, bonuses in some cases - that puts the whole clause at risk.

This is an existing problem, but it can be circumvented by a general guarantee that the payment on termination won't be less than the minimum required under the ESA.

Additional ESA Liabilities

This is an interesting point which I've extracted from an argument made by Professor David Doorey. He argues that all common law pay in lieu of notice is protected by the ESA, because of the expansive definition of wages under the ESA, which includes "monetary remuneration payable by an employer to an employee under the
terms of an employment contract, oral or written, express or implied". By operation of this, he argues, the pay in lieu of notice to which an employee is entitled at common law, arising out of an implied contractual term, should be considered wages owing within the meaning of the ESA.

The argument is completely inconsistent with the established jurisprudence, though you have to admit that there's a certain persuasiveness to it at face value. However, I disagree with it, on the basis that, at common law, there's not really such a thing as "pay in lieu of notice". There is *actual notice*, and there are damages for failing to provide adequate notice. The principles of damages are tied into the compensation principle and mitigation principle, and they aren't always owing. Accordingly, it doesn't seem correct to call them 'wages' within the meaning of the ESA.

However, that counter-argument doesn't extend to written contractual terms expressly entitling the employer to dismiss on 'pay in lieu of notice'. In such a case, the contract itself says "The employer will pay x to the employee". Fits pretty neatly into the statutory definition of wages, in that case.

As I said, this is still in conflict with the established jurisprudence. But there's a persuasive legal argument for it. In which case an employer with such a written contract would be statutorily obligated to pay out the full contractual notice within the narrow time frames set out by the ESA, and unable to insist on a release being signed in exchange.

Mitigation

I explained part of this in context of the Bowes v. Goss Power case, which has been heard but not yet decided by the Ontario Court of Appeal. The mitigation principle arises from a breach of contract. If the contract has not been breached, it seems incoherent to suggest that the mitigation principle arises. (Again, this is at odds with established jurisprudence, but again, there's a strong argument that the established jurisprudence is wrong.)

If I'm right about this, then a contractual term permitting an employer to dismiss on pay in lieu of notice would require the full amount be paid regardless of mitigation efforts or even of successful mitigation.

In theory, one could draft language permitting salary continuance, which preserved the obligation of the employee to mitigate and preserved the right of the employer to discontinue the payments upon successful mitigation...but this would be complex, and it ultimately may not work. In particular, I'm concerned about how the employer would enforce the employee's obligation to seek replacement work. In practice, it would probably be seen as continuing the employment relationship on actual notice and in a different form, and terminating payments because of a failure to mitigate would probably be seen as a termination for "just cause", which is a high threshold for the employer to prove.

Similarly, the possible expansion of ESA protection to contractual pay in lieu of notice would likely lead to the same conclusion, that the contractual pay in lieu of notice is not subject to mitigation, and must be paid regardless.

All things considered, an employer will often be served perfectly well by a contract which makes dismissal without notice into a breach, whereas a contract entitling them to dismiss on pay in lieu of notice is not without its risk.

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